Value Investment Partners Economic Outlook

May 2018

May saw the expected correction in markets after a meteoric rise of the all ordinaries in April. With it came strong returns from Challenger, which posted a return of 19.35% for May after being somewhat lacklustre for the last six months. Aristocrat Leisure and CSL also continued their outstanding performances this year, posting returns of 12.71% and 9.09% for the month. Internationally, the feature of global movements has had predominant focus around the Singapore Summit with President Trump finally meeting with North Korea’s Supreme Leader Kim Jong-Un after much hype. While the general consensus among political commentators is that promises and agreements made by the leaders must be taken with a grain of salt, the outcome of the meeting (among other points) essentially reaffirmed the April 27, 2018 Panmunjom Declaration, in which North Korea commits to work towards the complete denuclearization of the Korean Peninsula. It is noted that North Korea has made this promise without action numerous times. Significantly, Trump’s major move was to announce the end of military exercises with South Korea as an assurance to North Korea to provide them with security guarantees. The importance in this point is that this leaves South Korea largely exposed in the event of a North Korean invasion. Without consultation with South Korea or US Forces Korea, it is this decision from Trump that has convinced commentators that North Korea won the summit. Around the globe, the central banks are tightening their monetary policies, with the US Federal Reserve, the European Central Bank, The Bank of Japan, and the Bank of England predicted to become contractionary in the next few months. In contrast, China is enforcing monetary easing in order to divert an investment bust, which in itself could cause waves through a weaker yuan. Specific to the US, as quoted in the Telegraph (London): “The unwinding of quantitative easing implies a loss of $US2 trillion ($2.7 trillion) in annual net stimulus by December, compared to peak QE. Nobody knows what the consequences will be as the Fed reverses the process at an accelerating pace, lifting bond sales to $US50 billion a month by early autumn. It is uncharted territory.” The world has never been so in debt before, and as such has never been more vulnerable to monetary tightening. The property market on Australia’s east coast is in itself a great example. According to the Institute of International Finance, world debt reached 318% of GDP for 2017. It is safe to say the world’s central banks will play a particularly strong hand in the progression of financial markets in the coming years. Looking ahead, VIP continues to keep a keen eye on trade talks coming out of the US, which will highly influence the decisions made by the Investment Committee. Source: Telegraph